Written by Mashud Abukari
On August 9, 2011, members of the Federal Open Market Committee which includes the Board of Governors of the Federal Reserve met for their fifth scheduled meeting this year. During this meeting, the committee reviewed some economic and financial conditions and voted on maintaining the target range for the federal funds rate at 0 to ¼ percent at least through mid-2013. This new development from the Federal Reserve comes as a pleasant surprise to some and a dismal shock to others.
The decision to keep interest rate at a usually low rate demonstrates that the economy has yet to fully recover from the recent financial and economic crisis. In many respects, the Fed has exhausted most of its monetary policies therefore had to result into giving some certainty to the market through this announcement.
It is clear from the minutes that the Fed perceives that economy is weaker than projected. The current press release noted the overall deterioration in the labor market conditions, the increase in unemployment, the flattening of household spending, and weakness in the nonresidential structure investments. These weaknesses in the economic conditions demand an aggressive and a bold move by the Federal Reserve. The decision from the August meeting shows the boldness of the Federal Reserve to restore the economy into good health. It gives the market some certainty in the interest rate environment and assists the market in planning and preparation.
On the other hand, the three dissenting votes also highlight the division within the Federal Reserve. It’s interesting to note that this one of the few times where there is ever a major disagreement within the Federal Reserve. According to the minutes, the three that voted against the measure would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period. They were opposed to the giving the market specific dates. However, the decision to keep interest at low levels is not a good signal moving forward. It’s problematic because of the threat inflation that would rise because of this policy shift. Already, gold prices have reached high levels which signal that the market is a least thinking about inflation. Gold prices have historically been the measure of real prices and a good indicator for inflation. The employment market still doesn’t look favorable, unemployment rate is still hovering around 9.1%.
Dismal Scientist. Moody, 11 Aug. 2011. Web. 12 Sept. 2011. <http://www.economy.com/dismal/pro/article.asp?cid=223965>
“FRB: FOMC Minutes, August 9, 2011.” Board of Governors of the Federal Reserve System. Federal Reserve, 9 Aug. 2011. Web. 14 Sept. 2011. <http://www.federalreserve.gov/monetarypolicy/fomcminutes20110809.htm>.
“FRB: Press Release–FOMC Statement–August 9, 2011.” Board of Governors of the Federal Reserve System. Federal Reserve, 9 Aug. 2011. Web. 14 Sept. 2011. <http://www.federalreserve.gov/newsevents/press/monetary/20110809a.htm>.